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I've recently finished my first microeconomics class, and I'm looking to further the subject a bit more. At the moment, we've only dealt with the formation of a market's supply as the addition of all the individual firms' marginal cost, defined as a function of labour and physical capital.

I'm interested for learning's sake in finding a theory that also takes into account the firm's expansion projects, i.e., its plans to increase its physical capital. We briefly touched upon long-term production equilibrium, but did not relate individual long-term production equilibrium to access to credit.

It seems to me that a more complete theory should take into account that a firm demands credit in order to obtain said capital. It also seems to me that this demand for credit should influence a firm's production decisions, insofar as the availability and the characteristics of said credit should determine a firm's profit goals. In this sense, in my (not yet sophisticated) understanding of the issue, we could think of credit influencing the market supply of whatever good the mentioned firm produces.

Would there be any references that could help me learn more about the subject, or economists who have already shown this way of thinking to be wrong, or books about the subject? I'd be looking for some theory of how supply, production, expansion and credit availability are related at the microeconomic level.

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  • $\begingroup$ If anyone has other interesting suggestions, feel free to let me know and I will award an additional bounty $\endgroup$
    – shintuku
    Jul 16, 2022 at 9:52

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In my opinion, the literature on this topic is relatively scarce, and I do not really understand why. Probably because the Modigliani-Miller theorem on the irrelevance of firms' capital structure has some influence and divert research from this area. Also because it is not easy to have access to good data on firms financial situations (and whether their access to credit is constrained or not).

Below are the few references that I know, but which are probably not easily accessible to 1st year economic students. You will also find interesting expositions and discussions of the Modigliani-Miller theorem in most textbook, or here.

Bond, S. and Meghir, C. (1994), "Dynamic Investment Models and the Firm's Financial Policy," Review of Economic Studies, 61, 197-222.
Funke, M., Maurer, W. and Strulik, H. (1999), "Capital Structure and Labour Demand: Investigations Using German Micro Data," Oxford Bulletin of Economics and Statistics, 61, 199-215.
Harhoff, D. (1998) “Are There Financing Constraints for R&D and Investment in German Manufacturing Firms?,” Annales d’Économie et de Statistique, 49/50, 421–56.

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  • $\begingroup$ Thank you so much for the help! Teachers are all on vacations or something and won't answer their emails so I was feeling a bit lost, this is all going on the summer reading list! $\endgroup$
    – shintuku
    Jul 15, 2022 at 19:23

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